Once the owners and the property management company have agreed on principles, objectives and a management plan, it’s in the best interests of both parties to formalize their agreement. The property management company and owner must work out the structure of their relationship regarding fees, specific responsibilities and liabilities, the scope of the manager’s authority, and the duration of the management agreement. In addition, the owner must turn over management records and other pertinent property information to the management company to facilitate the operation of the property. A clear line of communication with the owner is critical throughout the management process.
Three basic relationships can exist between a property management company and the individual or corporate owner of a building: some are employer-employee arrangements, some are principal-agent arrangements and a few are formal fiduciary relationships.
The employer-employee relationship is most common with banks, universities, large corporate firms and other private institutions that typically require the services of an on-site manager for their properties. The employee-manager is directly responsible to the officers of the owner-employer corporation or institution, which may be the principal occupant of the property. Although no formalized contract is necessary in an employer-employee relationship, the issues set forth in a typical management contract between agent and principal must still be settled. The employee-manager’s working relationship with the owner must be structured along the same lines as that of the property manager who operates as an agent.
The principal-agent relationship is created by a written contract signed by both parties, which empowers the property management director, as agent for the owner to act on behalf of the owner, or principal, in certain situations. Implicit in this relationship are certain legal and ethical considerations that the property manager must accord the owner. These considerations are based on the law of agency.
An agent has certain duties that are imposed by agency law. This is because an agent has a fiduciary relationship with his or her principal. A fiduciary relationship is a confidential relationship that requires the highest degree of loyalty on the part of the agent. Implicit in this fiduciary relationship are other duties as well, including the duties of loyalty, care, obedience, accounting and disclosure.
The duty of loyalty means that the property management company must always put the property owner’s interests first, above his or her own interests. The property management company must act without self-interest.
The duty of care requires the property manager to exercise a reasonable degree of skill while managing the property.
The duty of obedience means that the property manager must carry out, in good faith, the property owner’s instructions. However, if the property owner requires the property management team to do something that is illegal or unethical, the property management director should immediately terminate the relationship.
The duty of accounting requires the management company to accurately report on the status of all funds received on behalf of or from the property owner (such funds are referred to as escrow funds). State real estate licensing laws typically include detailed accounting requirements that must be followed explicitly by the property management company in regard to escrow funds. These laws virtually always prohibit commingling by the property management firm, that is, combining escrow funds with the property management director’s business or personal funds.
The duty of disclosure imposes on the property management company the duty to keep the owner fully informed of all material facts regarding the management of the property.
While many rights and responsibilities of the agent and the property management company are imposed by agency law, all the property management company’s rights and responsibilities should be spelled out in detail in the property management agreement.